Can a Reduced Prison Term Constitute New Value Under 11 U.S.C. 547(c)(1)

By: MaryBeth C. Allen
St. John's Law Student
American Bankruptcy Institute Law Review Staff

In a case of first impression, a New York bankruptcy court[1] suggested that a reduced prison term could be considered new value for purposes of the 11 U.S.C. § 547(c)(1) preference defense.[2] In Citron, the debtor pled guilty to numerous felonies after entering into a criminal plea bargain agreement, which included a $75,000 fine and a reduced prison term.[3] The debtor paid the $75,000.00 fine two days before filing chapter 13.[4] There was no dispute that the payment was preferential,[5] but the court dismissed the State’s motion to dismiss based on the affirmative defense of new value under section 547(c)(1), not because it was inapplicable, but for lack of evidence of value.[6]

To encourage creditors to continue doing business with a struggling debtor,[7] the Bankruptcy Code allows creditors to defend against the trustee’s avoidance powers, if the creditor can show the debtor’s payments were in exchange for new value under section 547(c)(1).[8] Courts have interpreted new value to mean anything that does not diminish the value of the estate.[9] Previously, the application of the new value defense has been limited to exchanges where the new value was calculable and was equivalent to or greater than the payment made by the debtor.[10] Courts will allow the trustee to avoid part of the debtor’s payment if the new value received is less than debtor’s payment.[11] Therefore, a calculation of the new value is necessary to determine whether it is equivalent to, more or less than the preferential payment so that it can be determined how much, if any, of the payment can be avoided as a preference.[12]

The court recognized the need to calculate the value of the plea agreement and remanded the case for trial. The court specifically requested evidence “as to the quantitative value of the reduced prison term and/or reduced fines from which this Court could determine the extent to which New York provided new value.”[13] The court, ruling on a motion to reconsider, held that the payment was a contemporaneous exchange, therefore the State need only prove the extent of new value it gave to the debtor, in order to avail itself of the section 547(c)(1) affirmative defense. 

Although restitution payments have been avoided by trustees as preferences,[14] the issue of whether a fine as an integral part of a criminal sentence can be avoided as a preference has not been addressed by bankruptcy courts. If the lesser jail term is to be considered new value, the State must prove its monetary value with specificity.[15] 

 


[1] In re Citron, 428 B.R. 562 (Bankr. E.D.N.Y. 2010).

[2] Id. at 575–76, reconsideration denied,No. 08-71442-ast., 2010 WL 2902786 at *5 (Bankr. E.D.N.Y. July 23, 2010).

[3] In re Citron, 428 B.R. at 566. 

[4] Id. at 567.

[5] Id. at 568.

[6] Id.

[7] 3 Collier on Bankruptcy, ¶547.04, at 547-46 (Alan N. Resnich & Henry J. Sommer eds., 16th ed. 2009). 

[8] 11 U.S.C. § 547(c)(1) (2006).

[9] 3 Collier, supra note 7, at 547-47.

[10] 11. U.S.C. § 547(a)(2); see also 3 Collier, supra note 7, at 547-46. 

[11] See Robert H. Bowmar, The New Value Exception to the Trustee’s Preference Avoidance Power: Getting the Computations Straight, 69 Am. Bankr. L. J. 65, 68–69 (Winter 1995).

[12] See generally id. at 70–83.

[13] In re Citron, 428 B.R. at 574. 

[14] In re Citron 428 B.R. at 574 –75 (citing numerous cases all stating restitution payments are avoidable).

[15] 3 Collier, supra note 7, at 547-46 & n.6.